3.3.1 Quantifying Cost Risk Early in the Life Cycle

Abstract

A new method for analyzing life cycle cost risk on large programs is presented that responds to an increased emphasis on improving sustainability for long‐term programs. This method provides better long‐term risk assessment and risk management techniques. It combines standard Monte Carlo analysis of risk drivers and a new data‐driven method developed by the Hoy and Hudak (1994). The approach permits quantification of risks throughout the entire life cycle without resorting to difficult to support subjective methods. The Hoy‐Hudak methodology is shown to be relatively straightforward to apply to a specific component or process within a project using standard technical risk assessment methods. The total impact on system is obtained using the program WBS, which allows for the capture of correlated risks shared by multiple WBS items. Once the correlations and individual component risks are captured, a Monte Carlo simulation can be run using a modeling tool such as Analytica to produce the overall life cycle cost risk.